I help parents reduce the cost of college and pay for it as wisely as possible. With the cost of the most expensive colleges today now in excess of $65,000 per year, even students from families with incomes over $200,000 can qualify for need-based aid. But it's often a combination of tax savings and financial aid that saves families the most money when paying for college. I am the CEO of Stratagee.com, a provider of college planning advice to families and college planning software and services for financial advisors. I have spent twenty two years pioneering this field, integrating expertise in college admissions, financial aid, tax aid and the family's personal resources into a best strategy.

If You Earn $250,000, Politicians Expect 55% For Taxes And College Costs

At the $250,000 income level that is at the center of President Obama’s tax increase proposal, up to 55% ($139,133) of the $250,000 families earn goes to taxes and what they are expected to contribute toward the cost of college each year.

After paying $73,696 in federal, state (Pennsylvania), local and FICA taxes, parents with a household income of $250,000 are expected under the federal college aid formula to contribute an additional $65,437 per year toward the cost of college. For a college student to be eligible for need-based financial aid, the student must demonstrate a need for aid using the formula, the college’s Cost of Attendance – Expected Family Contribution = Financial Need. The student of a married couple earning $250,000 per year has an expected family contribution (EFC) of $65,437 per year based on the parent’s income alone, forgetting any assets they may count in the aid calculation, raising the student’s EFC even higher.

Since the most expensive colleges today are now right at or slightly over $60,000 per year, the student’s EFC of $65,437 will exceed the cost of attendance and, therefore, the student will not be eligible for any need-based college aid. However, the student will not be expected to pay more than the cost of attendance (sticker price), so the family’s out-of-pocket cost is $60,000 per year at the most expensive colleges in the country. If the student chooses to attend a college with a lower sticker price, then the lower sticker price becomes the family’s out-of-pocket cost – assuming the student doesn’t receive any merit aid or scholarships.

Using the highest college sticker price of $60,000, along with the tax owed on $250,000 of $73,696, the total comes to $133,696, 54% of the family’s gross income.

Compare that to the 32% ($23,868) that is expected to be contributed toward the cost of college and paid in taxes on an annual income of $75,000. This $75,000 family has an EFC of $9,142 per year, and is expected to pay $14,726 in total federal, state, FICA and local taxes.

$75,000 = $23,868 = 32%

$250,000 = $139,133 = 55%

These facts highlight the real burden on middle class families from $75,000 – $250,000 to pay for college each year for just one child. It seems, at 55% of gross income, that those families making $250,00 are already doing their fair share of paying higher taxes and the full sticker price of college, let alone potential new taxes. The way the syytem works, lower income families benefit from the higher tax and tuition revenue generated from the $250,000 families by getting a college education at a lower out-of-pocket cost. The tax dollars fill the state and federal coffers and in turn provide state and federal college aid subsidies to the lower income families, while the same $250,000 family pays full sticker price for college. So the $250,000 families indirectly subsidize lower income families twice, with taxes and full tuition revenue to the colleges. Colleges clamor for what are called “full-pay families” for this very reason.

I am not suggesting that families making $250,000 per year cannot afford college, particularly a lower priced college. However, I do think it is important to know who is already paying what in taxes, and how much they are expected to contribute toward the cost of college. Taxes and college affordability are important points in both presidential candidate’s campaigns.

Our current president wants to raise taxes on parents with $250,000 of income and higher. The status of this major tax question hangs in the air until the presidential election is decided in November. But don’t wait for November because one thing is certain today, the time has come for all middle class families to have an integrated college planning strategy based on: College selection, financial aid, tax aid and financial planning. What’s more, when tuition and tax bills come, the bills don’t care if you are registered Republican or Democrat, or where you stand relative to the fiscal cliff – they just need paid! How you pay those bills each year will definitely have a lasting impact on your retirement savings too.

So we all need to know ahead of time where our children may be able to get into college and get aid, and what our best strategy is to pay for the colleges that are the best fit for our children. It’s time to get started. Carpe diem.

Ps: In response to some of the comments made, I’ll note that students of parents making $120,000 per year, when attending lower priced in-state universities, often do not qualify for any need-based aid either.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

However, I would like to make a new point- that while individuals earning less have an easier time getting need-based aid, individuals making more have an easier time getting merit-based aid.

Supporting argument #1: Dual-income families are rarer at higher income brackets, allowing for more parent interaction with children. Assuming that parents try to keep tabs on their kids’ schoolwork, it should be easier with one parent at home to make sure the kids are on top of their work.

Supporting argument #2: If you subscribe to even the most basic meritocratic theory, you would agree that those with higher incomes tend to be brighter/more motivated/more successful/etc. Therefore, children of these successful individuals should tend to also share some of these traits, whether through genetics or upbringing (I’ll leave nature v nurture up to the reader).

Personally, I saw this effect firsthand in my high school- I attended the Rochester, MN public school district, and if the reader is not familiar, Rochester, MN is the home of both the Mayo Clinic and a very large IBM campus. Both employers presence in 100,000-strong Rochester leads to a very disproportionately high number of advanced degree holders (and advanced income earners) in a otherwise unremarkable town. The meritocratic effect I referred to earlier came into full-force when I was applying to schools and learning what my class rank was. Even with a weighted GPA of 3.85, I barely scraped in the top 1/3rd of my (public) high school class. A close friend, with a weighted 4.6 (!) GPA was not even among the top 10 of the graduating class, let alone valedictorian. (note: while he was admitted to UCLA, he chose U of MN because they offered a full-ride merit scholarship.)

Long story short, my high school classmates came (on average) from a much more succesful “stock” than your average middle-sized midwestern town, and, consequently, went on to achieve more scholarships and to attend more prestigious schools.

“I also included the statistics on families making $75,000, which are also significant at 32% of gross income…….The point being made is that they are expected to pay sticker price at all colleges if their children don’t get those merit aid scholarships.”

FYI, any child whose parents make less than 90,000 dollars go to Harvard for FREE (regardless of merit-based scholarships). Fact-checking, my friend…

I was referring to families making $250,000 when I said “they” in the comment you are referring to, and “they” will be expected to pay sticker price. I am well aware of the facts, and by the way, a lot of families making $250,000 started out well below that and through their education, innovation and motivation have made their way to a higher income. Furthermore, it is clear throughout this post that the upper middle class are already making a significant contribution to help lower income families. If you feel the need to blame those that make more money for “drowning” the lower middle class in debt, because they don’t live paycheck to paycheck, then why do you even make the case for going to college to get ahead? Will then you too not be righteous down the road if you aren’t living paycheck to paycheck and earn more than your parents? And if so, are you purposely and selfishly responsible for drowning the lower class in debt? people go to college to get ahead, but when you get ahead you suddenly are a heartless soul. Once again, the point of this post is that if it were not for the upper middle class paying the taxes and the tuition that they do, taxes and tuition costs for lower middle class would be higher. So the central question is, should we now raise taxes on those who are already helping to foot the bill in a big way. Finally, the student debt issue could have been avoided in large part if parents, students, colleges and government had used some common sense. I have literally thousands of clients who I have helped plan for college over 20 years, and by being a good consumer and thinking about what one is getting into, student loan debt was kept to a minimum, manageable amount. But I will say that American consumers in many ways were left to their own in the past several years when it came to being preyed on with abusive student loan practices, and several parties are responsible, including those taking the student loans, for not monitoring the situation. Still today though, people just blindly load up on student loans without any regard for how they will be repaid, or worse, by choosing a college they cannot afford and a major that is not commanding jobs, and they do it every day with total disregard, and not just students, but with parents encouragement. It is as if just getting the degree will take care of the rest.

“I was referring to families making $250,000 when I said “they” in the comment you are referring to, and “they” will be expected to pay sticker price.”

Again, “sticker price” =/ $60,000/year in the vast majority of situations; you could probably count the number of 60k/year colleges on your hands.

“If you feel the need to blame those that make more money for “drowning” the lower middle class in debt, because they don’t live paycheck to paycheck, then why do you even make the case for going to college to get ahead?”

If this is the message you got from my comments, I’d go back and re-read them. I never once even implied something of the sort, and I don’t know where you got “drowning” from. In fact, my point was that paying for college shouldn’t be an issue for someone making 250k/year unless -they- are living “paycheck to paycheck.” College is a worthwhile investment in your and your children’s personal capital IF the price of the investment isn’t an onerous financial burden, and if you make 250k/year, it shouldn’t be (unless you happened to have some bright triplets!)

Back to the point; I’m sure that families making 250k/year and -up- were perfectly capable of managing their finances in the 1990′s when top marginal rates were slightly higher, and despite rising tuition they will (or should) remain capable of doing so. Yes, they pay more in taxes that end up subsidizing college costs for those who wish they had the luxury of not having to fight for every grant, scholarship, and loan they could, and there’s nothing wrong with that. If it weren’t for federal student loan money like that, my father would have never paid for college, let alone medical school and an mph. For that, he, and by extension my family, is extraordinarily grateful for the opportunity to do so.

Isn’t that why it’s called needs based aid? When you make that kind of money and live in a $400k house, have 2 Mercedes, I find it hard to fathom helping pay for your kids’ college tuition. God forbid they have to take out student loans like I did…

The Jevon’s Paradox (http://en.wikipedia.org/wiki/Jevon%27s_paradox) in essence states that when resources become more efficiently used, they are used more often to the point where overall consumption increases.

In this case, it seems as though the more income an individual makes, the more of it they tend to spend. In other words, keeping up with the Joneses.

An argument made by the author uses comparative proportions of income expected to be contributed towards college and taxes. Ignoring that the author chooses the most expensive possible college (60k/year, no scholarships) to make the comparison look bigger than it really is (substituting $20k for tuition at an imaginary state school makes it only 40% of income for an 8% difference), one easily forgets that the 250k individual still has $120k+ left after college costs, while the 75k individual has less than half that, about $52k.

Again, there is no real problem here. The author invents one by assuming that individuals who make 250k have to spend like they made 25k. Prudent financial decisions, such as state schools, investing in your child’s education so that merit-based scholarships can be awarded, and most of all, not living beyond your means, are the answer, not the extension of some marginal top income bracket tax cuts.

Garrett, seriously are you reading the post and my comments? This is NOT a discussion about whether or not they can afford it, or in any way that I am making a “problem.” If you actually read the post I point out very clearly that if the family chooses to go with a lower priced college that their cost would go down. It is a post about various levels of income tax and expected family contribution that correspond to two levels of household income. You are making this into something it is not. The big debate is whether or not to raise taxes on families earning $250,000 and above, and this post points out that ALL middle income families need help here!!

I did indeed read the post and responses, and my conclusion remains that raising taxes on 250k+ earners should not significantly effect their ability to pay for their childrens college because college costs do not make up nearly the chunk of income for those earners as it does for those who make less.

I said that it is a manufactured issue because 250k+ earners have never had a problem paying for college and will continue to not have a problem after the tax cut expiration, barring of course poor decision-making on their part in choosing schools. Period.

Mr. Onink, I understand that what I am stating next is in no way any extension of your “Contributor” status, but I feel it raises an issue that is relevant to your piece. Inversely to picking Obama’s proposed plan and applying it in the way you did, it would be interesting to compare how a proposed “revenue neutral” Romney Tax Plan would look when it’s time to pay the tuition for the two families in your piece.

The BIG DEBATE as you put it, is big for a much smaller percentage of American’s than the percentage of Americans that fall under the $75,000 scenario. Thus in my mind, making it a small debate compared to the topic I raise. You could still have your “post about various levels of income tax and expected family contribution that correspond to two levels of household income.” But instead of highlighting how the “rich”, or should I say the richest end of the “middle class spectrum” are burdened by an Obama plan, you could show how the TRUE middle class would be burdened by tax increases under a Romney plan. After all, your piece is about the impact on the “Middle Class”, no?

Thomas, you make a good point, and one I agree with. It’s not just about Obama’s plan, it is about who is paying what now and who will be paying what early next year. President Obama has drawn a line in the sand at $250,000 that we have all heard about for a very long time. So I think it is important to quantify what the reality is for people making $250,000 now. At this level they are already paying a lot in taxes and are paying a lot for college. By comparison, I point out that families between $75,000 and $250,000 are all expected to pay a hefty percentage of their gross income in taxes and college costs. So yes, this is about the middle class, and I did say that it doesn’t matter if you are Republican or Democrat when the tax and tuition bills arrive. That said, however you want to look at a Romney plan, if you know what it is, now we all have a reference point through the quantification in this post by which to put Romney’s plan into perspective too. But I will point out that it isn’t just about the 1% here. What happens to the 1% from a tax standpoint indirectly affects the other 99% too. We are all in this together, and even if Obama wins reelection, both the country and Obama are going to need Romney’s hyper IRA investing secrets so that we can invest our way out of the impending crush of debt. Ironically, King Solomon was the richest man alive in his day, yet his writings emphasized the danger of debt. The people who have been running the richest nation in the world for the past 200+ years should have taken Solomon’s advice. With what we are facing today, perhaps his advice was the real treasure.